A New Model for Financing Nonprofits

Not-for-profits have a new way to get financing.

NPX, a company that is developing a model for nonprofit investment, announced Tuesday the creation of a financial instrument that ties donations and investments in charities to performance. The idea is the brainchild of Lindsay Beck, a two-time cancer survivor, who co-founded NPX with Catarina Schwab, and Anna Pinedo, a partner at Mayer Brown.

This approach to raising money for philanthropy has received backing by a series of boldfaced names, including Richard Branson, the founder of Virgin Group; Pierre M. Omidyar, the founder of eBay; and Duncan Niederauer, the former chief executive of The New York Stock Exchange.

Here is how it works: A group of donors contributes to what is called a “donor fund.” A separate group of investors — who expect to get their money back and more — buy into performance-based bonds. The money raised from the bonds is used to finance the nonprofit. If the organization achieves a certain set of goals, the donor funds are then — and only then — used to pay off the bondholders.

If an organization “falls short of its impact targets, investors may lose some or all of their investment and the donors in the fund will redeploy the remaining funds to other nonprofits of their choosing,” NPX said in a statement explaining the arrangement.

The experimental model is still in its infancy and it will not be known for several years whether it works or whether it will be adopted by others.

The Last Mile, a charity that provides coding education and vocational opportunities to incarcerated individuals, is the first the first nonprofit to use the new instruments.

Investors have bought $800,000 worth of performance-based bonds to finance The Last Mile’s web development shop inside San Quentin State Prison in the Bay Area. If The Last Mile achieves certain targets, like “inmate hours worked” over the next four years, a separate donor fund that raised $900,000 will be used to repay the investors.